Your helpful landlord insurance guide to understand the different policy types, coverage options, costs, and exclusions. Learn why it's crucial to choose the right policy and coverages.
Whether you’re a long-standing investment property owner or giving thought to renting out your property for the first time, this quick guide to understanding landlord insurance will help educate you on what’s included, what’s excluded, and why you need it! In this article, we will cover some key things you need to know about this coverage, including why homeowners insurance won’t cover rental properties, key coverage options available, typical exclusions to be aware of, potential costs involved, and the overall importance of this insurance. By the end of a few minutes of reading (we have bullet points for those in a hurry!), you will have a better grasp of landlord insurance and be equipped to make better-informed decisions to protect your rental property and financial interests. Let’s jump in and provide some help on these topics.
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Why Homeowners Insurance Won’t Cover Rental Properties
Let’s start with an important rule of thumb. Homeowners insurance is designed to protect owner-occupied homes, and it will almost always fall short when it comes to covering rental properties – in fact, your homeowner’s insurance will likely exclude any rental activities, even if you are renting out your garage apartment to your nephew (so be careful with this one!). There are two main reasons why homeowners’ insurance can’t be relied upon:
- Different Risks: Rental properties face unique risks compared to owner-occupied homes. Landlords have limited control over how tenants use and maintain the property (at least compared to their primary use and occupancy), thereby increasing the likelihood of loss and resulting damages.
- Personal Property Exclusions: Landlord policies typically exclude personal property coverage. Unlike homeowners who have their belongings on the property, tenants are responsible for insuring their own possessions. Instead, a landlord insurance policy focuses on protecting the structure of the property and mitigating the landlord’s liability.
Who is Covered Under a Landlord Policy
Landlord insurance primarily covers the property owner but don’t forget your managers. Typically, a property management company that handles the day-to-day operations of your rental property, will require in your agreement with them, that they also be covered under your policy as a so-called “additional named insured“. While most policies will allow you to add your manager without additional cost, it’s still important to clarify the extent of your manager’s coverage for both parties benefit.
Short-Term Tenants vs. Long-Term Tenants
Understanding or strategizing about the length of your tenants’ occupancy (i.e. lease terms) is crucial as it can impact the type of coverage you need and may be eligible for. Different insurance considerations apply to short-term and long-term tenants (and some insurance companies may outright exclude coverage for short-term rentals or those without a 12-month or greater lease term):
- Short-Term Tenants: If you rent your property on a weekly or monthly basis, such as through vacation rentals or platforms like VRBO or Airbnb, you may need additional coverage or a specialized policy. Standard landlord insurance may not permit or adequately protect against the unique risks associated with short-term rentals.
- Long-Term Tenants: Traditional landlord insurance policies typically cover tenants who lease the property for 12 months or longer. Most insurance companies structure their landlord insurance programs for tenancies that are long-term in nature.
Types of Landlord Insurance Policies
When it comes to landlord insurance, there are several policy types available to meet the varying needs of property owners. Let’s explore the most common types of landlord insurance policies:
DP1 (Basic Form)
DP1 policies, also known as Basic Form coverage, offer basic protection for rental properties. Key features of DP1 policies include:
- Coverage: DP1 policies provide coverage for specific perils, such as fire, lightning, windstorms, vandalism, and explosions. These policies have a limited and specific named list of covered perils. So, if the cause of loss is not specifically listed, it’s excluded!
- Limitations: DP1 policies offer more minimal coverage as noted above. Equally important, however, they provide actual cash value (ACV) settlements for property damage, which means that the reimbursement takes into account depreciation and may result in a much lower amount of reimbursement depending on things such as the age of the property at issue.
DP1 policies are considered the most basic form of landlord insurance and are typically suitable where other forms are not available given the type, age, condition, or location of the property.
DP2 (Broad Form)
DP2 policies, also known as Broad Form coverage, provide more comprehensive protection than DP1 policies. Key features of DP2 policies include:
- Coverage: DP2 policies cover a broader range of perils compared to DP1 policies. In addition to the named perils covered under DP1, DP2 policies may include coverage for damage caused by water, ice, snow, falling objects, burst pipes, and more. Like DP1 coverage, however, only specifically identified perils are covered. Remember, any causes of loss that are not specifically named in the policy, are excluded!
- Settlement Options: DP2 policies generally offer either ACV or replacement cost settlements for property damage. Replacement cost settlements provide reimbursement based on the cost to replace or repair the damaged property without considering depreciation — thus providing a larger reimbursement amount in the event of a loss.
So, given the larger number of named perils, plus the option for replacement cost settlement, DP2 policies offer greater coverage than DP1, albeit DP3 policies remain the best approach for more complete coverage.
DP3 (Special Form)
DP3 policies, also known as Special Form coverage, provide the most comprehensive dwelling-policy protection for rental properties. Key features of DP3 policies include:
- Coverage: DP3 policies protect against all perils unless specifically excluded in the policy. This means that the policy covers a wide range of risks that are not specifically listed like the DP1 and DP2 policies, thus providing more robust protection for your rental property. Put simply, your policy covers all causes of loss which are not excluded in the policy!
- Settlement Options: DP3 policies typically offer replacement cost settlements for property damage as explained under DP2 above.
Given the wider coverage for causes of loss and the standard use of replacement cost for loss valuation purposes, DP3 policies offer the highest level of dwelling-policy coverage and are recommended for rental properties.
Commercial Policy under a Business Owner’s Policy (BOP)
Above we discussed dwelling policy coverage (remember DP1, DP2, and DP3). For landlords with wider risks, multiple properties, or a large real estate portfolio, a commercial policy is a great option (or perhaps required!). Commercial policies (e.g. property, liability, loss of rents, and more) are often bundled under a Business Owner’s Policy (BOP) and offer a comprehensive range of coverages tailored to the specific needs of landlords. This means that there is flexibility to add more coverage options to the BOP, beyond those that are typically part of the standard coverage program.
Key Coverage Options in Landlord Insurance
When it comes to landlord insurance, there are several key coverage options available to protect your rental property and mitigate potential risks. Let’s take a look at the primary coverage options offered in landlord insurance policies:
Property Damage Coverage
Property damage coverage is a fundamental component of landlord insurance and protects the physical structure of your rental property. It typically includes the following:
- Structure: This coverage protects the main building, including walls, roof, foundation, and fixtures, from damage caused by covered perils such as fire, lightning, windstorms, explosions, vandalism, and more.
- Other Structures: Landlord insurance may also provide coverage for other structures on the property, such as detached garages, sheds, or fences. It’s important to make sure that your policy covers other structures given that not all insurance companies provide such coverage in the base policy. If other structures are included, the coverage limit is usually a percentage of the total property-coverage limit (often referred to as Coverage A).
- Perils Covered: As noted earlier, the policy will specify the perils covered in a DP1 or DP2 policy or list the exclusions in a DP3 policy. Common covered perils include fire, lightning, windstorms, hail, explosions, smoke damage, vandalism, theft, and water damage from burst pipes.
Liability coverage is crucial for landlords as it protects against financial losses resulting from third-party claims of bodily injury or property damage. Key aspects of liability coverage include:
- Premises Liability: This coverage protects a tenant or visitor who is injured on your rental property and holds you responsible for their injuries. It covers medical expenses, legal fees, and potential settlement costs if you are found liable.
- General Liability: Above, there was an important element to premises liability in that it relates to damage that is caused on or at the premises. General liability is much broader, and it covers exposures for things related to matters that may occur outside the premises. Often, it’s important on DP policy to obtain the added general liability policy to provide the necessary coverage for causes of loss outside of the rental property. BOPs, on the other hand, typically contain general liability protection that brings together the coverage needed for both general and premises liability.
Loss of Rents Coverage
As noted a few times above, loss of rents coverage is an essential aspect of landlord insurance, providing financial protection when your rental property becomes uninhabitable due to a covered peril. Key features of loss of rents coverage include:
- Compensation for Lost Income: If your property becomes unlivable due to a covered peril, loss of rents coverage provides reimbursement for the rental income you would have received during the repair or rebuilding period, subject to policy limits.
- Time Limitations: Importantly, there is usually a time limit or a maximum reimbursement period specified in the policy. It’s important to review and understand the specific terms and limitations of the loss of rents coverage.
Additional Coverage Options
Depending on the insurance carrier, there may be additional coverage options available in landlord insurance:
- Ordinance or Law Coverage: This coverage helps cover the increased building costs associated with bringing your property up to current building codes and regulations after a covered loss. It ensures compliance with local ordinances and laws which continue to change across the country.
- Equipment Breakdown Coverage: This coverage protects against the costs of repairing or replacing essential equipment and systems in your rental property, such as HVAC systems, electrical panels, or appliances, due to sudden mechanical or electrical breakdown.
- Umbrella Insurance: As noted above, umbrella insurance provides additional liability coverage beyond the limits of your standard landlord policy. It offers increased protection in case of significant liability claims that exceed the limits of your primary policy.
Understanding Costs and Comparisons
Understanding the costs associated with landlord insurance and comparing them to homeowners’ coverage is crucial for landlords to make informed decisions about their insurance needs. Let’s briefly explore the typical costs and comparisons:
Typical Cost for Landlord Insurance
The cost of landlord insurance varies depending on several factors, including the location of the rental property, the property characteristics such as age, its value, the coverage options selected, the deductible amount, the policy type, and the insurance company. On average, landlord insurance for smaller properties can range from a few hundred dollars to a few thousand dollars annually per property.
Cost Compared to Homeowners Coverage
Landlord insurance is generally more expensive. Premiums are higher because of the increased potential for property damage, liability claims, loss of rental income, and the like when a non-owner occupies your property — simply put, it’s not their own home, and that increases potential exposures. Landlords should anticipate budgeting a larger amount to cover insurance costs compared to their typical homeowner’s insurance policy premium.
Typical Exclusions under Landlord Insurance Policies
Understanding the typical exclusions in landlord insurance policies is essential for landlords to be aware of what risks may not be covered. Here are some common exclusions in landlord insurance:
- Acts of God: Certain perils, such as earthquakes and floods, are often excluded from standard landlord insurance policies. These events are considered “Acts of God” and may require separate insurance coverage to protect your property against these specific risks.
- Wear and Tear: Damage resulting from regular use, aging, and gradual deterioration of the property is typically not covered by landlord insurance. Landlords are responsible for routine maintenance and repairs associated with wear and tear, as it is considered part of the natural process of renting out a property.
- Intentional Damage: If damage is caused intentionally by either the landlord or the tenant, it is usually not covered by landlord insurance. This includes acts of vandalism, destruction, or deliberate harm inflicted on the property by individuals associated with the property or rental agreement.
- Negligence: Landlord insurance may not cover losses resulting from negligence, such as failure to maintain the property or neglecting necessary repairs. Landlords need to take proactive steps to maintain their rental property and promptly address any issues to minimize potential risks and ensure coverage.
- Vacancy: As earlier noted, if a rental property is left vacant for an extended period, it may face limited coverage or exclusions in landlord insurance policies. Insurance providers may impose specific requirements or restrictions on coverage for vacant properties, such as regular inspections or higher premiums, to mitigate the risks associated with unoccupied properties.
Lender Requirements for Landlord Insurance
While landlord insurance is often not legally required, lenders often make it a condition when obtaining a mortgage for a rental property. This is because lenders want to mitigate their risk and protect their recourse by ensuring that the property is adequately insured against potential hazards that impact their recourse. As a result, landlords should anticipate that providing proof of landlord insurance will be necessary when seeking financing for rental properties. Don’t forget this important step when securing insurance as you want to make sure to stay in compliance with your loan agreement!
Landlord insurance protects your property against damage, provides liability protection, and compensates for lost rental income. Remember that tenants should also have their own renters insurance to cover their personal belongings and liability. Understanding the different policy types, coverage options, costs, and exclusions is very important when choosing the right landlord insurance. By doing so, you can ensure that your rental property is reliably protected and minimize potential financial risks to your hard-earned properties. Always consult with insurance professionals to assess your specific needs and find the policy that best fits your requirements as a landlord and that of any lender (the details here really matter!).
IMPORTANT NOTE: The contents of this blog article are for educational purposes only and shall not be relied upon for any purpose, in any context. No representation or warranty of any kind or nature is provided. Some of the information herein may be incomplete and may not be updated. If you have any questions about insurance, insurance coverage, or any other information contained herein, you must consult your engaged insurance advisor or other relevant professional for any advice, consultation, or opinions. Some of the information herein may be incomplete and may not be updated.